Documents provided to Congress by several large companies show that they are seriously considering dropping their employer-provided health insurance coverage because the new health care law contains a very weak employer mandate. Companies are doing the math and realizing that paying a per-employee penalty to the government for not providing coverage is substantially less than paying per employee for health insurance. It is the right economic move based on the design of the new law, and was always the long-term plan of those who helped create it. From Fortune:

AT&T produced a PowerPoint entitled “Medical Cost Versus No Coverage Penalty.” A document prepared for Verizon by consulting firm Hewitt Resources stated, “Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care.” To avoid costs and regulations, “employers may consider exiting the health care market and send employees to the Exchanges.” (Under the new bill, employees who lose their coverage will purchase health care through state-run exchanges.)

Kenneth Huhn, vice president of labor relations at Deere, said in an internal email that his company should look at the alternatives to providing health benefits, which “would amount to denying coverage and just paying the penalty,” and that he felt he already had the ability to make this change under his company’s labor agreement. Caterpillar felt it would have to give “serious consideration” to the penalty option.

It’s these analyses — which show it’s a lot cheaper to “pay” than to “play” — that threaten to overthrow the traditional architecture of health care.

It should not be surprising that companies would think about dropping coverage in response to the design of the new law and its very weak employer mandate. I have been saying for months that a massive dropping of employer-provided coverage is the logical decision for companies, and now we have proof that several large corporations are following my logic.

Why employers provide insurance under the current system

Right now, it is dramatically cheaper, safer and better for many people to get health insurance through their employer than to buy it on their own. Employers also get a huge tax break on providing employee insurance. So, in a competitive job market, job-seekers are more likely to select employers that offer health insurance benefits. If companies are trying to attract workers, it makes more financial sense to offer them health insurance than higher salaries or other benefits. But the economics of offering insurance completely change if people without employer-provided insurance are getting their health care cost partially or mainly covered by the government.

For many low-income or middle-class people, the fact that a company offers a modest health insurance plan might not be a net gain. They could, in theory, be better or as well off without company insurance because the tax credits on the exchange might pay for more of their premiums than their employer would. And since employers would only pay a small penalty for not offering insurance, they would benefit financially by not providing health care.

The majority of bosses are decent people who want their employees to have health insurance. They would prefer their employees not be one illness away from financial ruin and know the individual health insurance market is a scam. But if the government is now guaranteeing that everyone can afford to buy regulated health insurance on their own, they won’t have any problem not offering coverage.

The economics are pretty simple. An employer could pay for employees’ ever-rising health care costs or pay a much smaller flat penalty, knowing that a government exchange will pay a significant part of their employees’ costs. While I don’t think most companies will ditch coverage right away in 2014, they will give the exchanges a few years to see if they work. In the long run, a major cut in employer-provided insurance is inevitable.

A feature, not a bug

My one dispute with the Fortune article is that it calls this an “unintended consequence.” That’s nonsense. The logic of this producing a system that encourages companies to drop coverage is clear. If you look at the people who helped President Obama design this law, they all oppose the employer-based system and wanted to eliminate it. The Administration also did not try to get a strong employer mandate. I strongly believe the incentive for a massive dropping of coverage was part of the plan and not a bug. We’ll find out around 2018.